Instructions For Form 1120-Reit - 2006 (Page 10 of 13) in pdf

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Do not deduct general overhead and

Deductions that are improperly allocated

administrative expenses in Part II.

Schedule A—Deduction for

between the REIT to its TRS; and

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Interest deductions of a TRS to the extent

Dividends Paid

that interest payments to its REIT are in excess

of a rate that is commercially reasonable.

Lines 1 through 5. Section 561 (taking into

Part III—Tax for Failure To

account sections 857(b)(8), 857(d)(3)(B), and

See section 857(b)(7) for details and

Meet Certain

858(a)) determines the deduction for dividends

exceptions.

paid.

Source-of-Income

Line 2f–Taxes Imposed Under

Line 3. Dividends declared in October,

Requirements

Section 856(c)(7) and Section

November, or December and payable to

shareholders of record in October, November,

Section 856(c)(6) provides REITs with a relief

856(g)(5)

or December are treated by the REIT as paid

provision if they have failed to satisfy the

Enter the taxes imposed for the following relief

on December 31 of that calendar year. The

source-of-income requirements of sections

provisions:

REIT is then eligible for the deduction for

856(c)(2) and 856(c)(3). If section 856(c)(6)

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Section 856(c)(7) relating to failures to meet

dividends paid for the year the dividends are

applies to a REIT for any taxable year, a tax is

the requirements of the asset test of section

declared even though they are not actually

imposed on the REIT under section 857(b)(5).

856(c)(4); and

paid until January of the following calendar

•

Section 856(g)(5) relating to failures to meet

year.

All REITs must complete lines 1a through 8

certain requirements under sections 856

of Part III to determine whether they are

If the REIT declared dividends in any of

through 859 (other than sections 856(c)(6) and

subject to the tax imposed under section

those months and actually paid them in

856(c)(7)).

857(b)(5). If line 8 is zero, the tax does not

January, as discussed above, enter on line 3

See section 856(c)(7) and 856(g)(5) for

apply, and the REIT does not have to complete

those dividends not already included on lines

detailed information on the requirements for

the rest of Part III. However, if line 8 is greater

1, 2, and 4 of Schedule A.

these relief provisions and check the

than zero, the REIT is subject to this tax, and

appropriate box(es) for the tax(es) imposed

must complete the rest of Part III to determine

Line 6. If, for any tax year the REIT has net

under them.

the amount of tax.

income from foreclosure property (as defined in

section 857(b)(4)(B)), the deduction for

Failures to meet the asset test requirements

A REIT that has failed the source-of-income

dividends paid to be entered on line 6 (and on

of section 856(c)(4) (other than de minimus

requirements of sections 856(c)(2) and

line 21b, page 1) is determined by multiplying

failures). Under section 856(c)(7)(A), a REIT

856(c)(3) may avoid loss of its REIT status as

the amount on line 5 by the following fraction:

may avoid loss of its REIT status as a result of

a result of the failure if, following identification

certain failures to meet the asset test

REIT taxable income (determined without regard to

of its failure to meet the source-of-income

requirements of section 856(c)(4) if, following

the deduction for dividends paid)

requirements, the REIT sets forth a description

identification of the failure, each of the

of each item of its gross income described in

following requirements are met:

REIT taxable income (determined without regard to

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sections 856(c)(2) and 856(c)(3) in an attached

The REIT sets forth a description of each

the deduction for dividends paid) +

schedule. In addition, its failure to meet the

(Net income from foreclosure property minus the

asset that causes the REIT to fail to satisfy the

source-of-income requirements must be due to

tax on net income from foreclosure property)

requirements of the asset test at the close of a

reasonable cause and not due to willful

quarter in a schedule for the quarter attached

neglect.

to its timely filed Form 1120-REIT;

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The failure must be due to reasonable cause

Schedule J—Tax

For information on the relief provisions

and not due to willful neglect; and

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under sections 856(c)(7) and 856(g)(5), see

The REIT either (a) disposes of the assets

Computation

the Instructions for Schedule J, line 2f.

shown on the specified schedule within 6

months after the last day of the quarter in

Line 1

which the REIT’s identification of the failure

A member of a controlled group must check

occurred (or such other time and in the manner

Part IV—Tax on Net Income

the box on line 1 and complete and attach

prescribed by regulations) or (b) the

From Prohibited

Schedule O (Form 1120). See Schedule O

requirements of the asset test of section

(Form 1120) and its instructions for more

856(c)(4) are otherwise met within the

Transactions

information.

specified time period.

Section 857(b)(6) imposes a tax equal to 100%

In addition, if section 856(c)(7)(A) applies to

Line 2a– Tax on REIT Taxable

of the net income derived from prohibited

a REIT for any tax year, the REIT must pay a

transactions. The 100% tax is imposed to

Income

tax which is the greater of:

prevent a REIT from retaining any profit from

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Most REITs figure their tax by using the Tax

$50,000 or

ordinary retailing activities such as sales to

•

Rate Schedule below. A member of a

the amount determined (as prescribed by

customers of condominium units or subdivided

controlled group must use Schedule O (Form

regulations to be promulgated by the

lots in a development tract.

1120) to figure its tax.

Secretary) by multiplying the net income

generated by the assets described in the

Tax Rate Schedule

Line 1. Gain from sale or other disposition

specified schedule for the quarter in which the

of property. Include only gain from the sale or

failure occurred by 35% (the highest corporate

other disposition of property described in

If taxable income (line 22, page 1) is:

tax rate).

section 1221(a)(1) that is not foreclosure

Of the

property and that does not qualify as an

Certain failures to meet the asset test

But not

amount

exception. See section 857(b)(6)(C) for

requirements of section 856(c)(4) that are

Over —

over —

Tax is:

over —

information on certain sales that do not qualify

de minimus errors. Under section

as prohibited transactions. See section 856(j)

856(c)(7)(B), a REIT may avoid loss of its REIT

$50,000

15%

for a special rule regarding a shared

status as a result of certain failures to meet the

50,000

75,000

$ 7,500 + 25%

50,000

appreciation mortgage. For tax years beginning

asset test requirements of section

75,000

100,000

13,750 + 34%

75,000

after October 22, 2004, certain sales of timber

856(c)(4)(B)(iii) if:

100,000

335,000

22,250 + 39% 100,000

•

property by a timber REIT qualify as an

Following its identification of the failure, the

335,000

10,000,000

113,900 + 34% 335,000

exception. See section 857(b)(6)(D).

REIT disposes of assets within 6 months after

10,000,000

15,000,000 3,400,000 + 35% 10,000,000

the last day of the quarter in which the REIT’s

15,000,000

18,333,333 5,150,000 + 38% 15,000,000

Do not net losses from prohibited

identification of the failure occurred (or such

18,333,333

- - - - -

35%

transactions against gains in determining the

time period prescribed by the Secretary and in

amount to enter on line 1. Enter losses from

the manner prescribed by the Secretary, or

•

prohibited transactions on the appropriate line

The requirements of the asset test of section

Line 2e

in Part I.

856(c)(4) are otherwise met within the

Enter the amount of the 100% REIT tax

specified time period.

Line 2. Deductions. Deduct only those

imposed on the following:

•

expenses that have a proximate and primary

Income of a REIT for services provided to

Note. There is no tax imposed and you are not

relationship to the earning of the income shown

the REIT’s tenants that is improperly included

required to attach a schedule of assets to Form

on line 1. Do not deduct general overhead and

in rents from real property reported by the

1120-REIT for the de minimus relief provision

administrative expenses in Part IV.

REIT instead of being reported by the TRS;

under section 856(c)(7)(B).

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Instructions For Form 1120-Reit - 2006 Page 10

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